Regulations on defined benefit pension funding should be reformed to stem the flow from them to defined contribution plans, according to a new OECD paper.
“If designed properly, funding regulations could help maintain DB systems for the long term and provide greater member security,” according to the paper, written by Juan Yermo, head of the private pensions unit of the Organization for Economic Cooperation and Development’s financial affairs division, and Clara Severinson, division administrator.
The paper addresses pension funding regulations across the OECD’s 32 member countries.
The authors suggest such funding reform measures as reducing the reliance on market values of assets and liabilities in determining contribution levels, limiting sponsoring companies’ ability to tap surpluses or take contribution holidays and setting minimum funding levels.
Also, policymakers could also improve regulation of risk management requirements for pension funds, as well as encourage DB plans to incorporate flexibility in benefits and pay more attention to how international accounting standards affect companies’ desire to close and freeze DB plans.
While mark-to-market accounting has arguably increased transparency and comparability of corporate financial statements, it “may increasingly dominate over other arguably more fundamental issues … as the biggest driver behind how and in what manner corporations remunerate their employees,” the authors wrote.
